The Republican-Proposed Carbon Tax

A group of prominent conservative Republicansincluding former Secretary of State James Baker III, former Treasury Secretary Hank Paulson, former Secretary of State George Shultz and former Walmart Chairman Rob Waltonmet with key members of the Trump administration on Wednesday about their proposal to tax carbon dioxide emissions and return the proceeds to the American people. Such an economy-wide tax on carbon dioxide could enable the United States to achieve its international emissions targets with better economic outcomes than under a purely regulatory approach.

Attributes of the Republican Carbon Tax Proposal

While the details on the plan from the newly formed Carbon Leadership Coalition (CLC) are considerably less specific than a legislative proposal, this is a well-thought-out and ambitious plan that makes a good-faith effort at addressing many of the difficult choices on the path to enacting a carbon tax. Consider the following attributes:

Significantly reduces emissions. The group proposes a tax that would start at $40 per ton of carbon dioxide emissions from fossil fuels and increase over time. A paper released by CLC provides a useful summary of recent modeling efforts on the effects of a carbon tax on emissions. It concludes that the CLC proposal (including the effects of rolling back some regulations) would reduce greenhouse gas emissions roughly 28 percent below 2005 levels by 2025, the upper end of the United States’ commitment under the Paris Agreement on climate change. It also implicitly recognizes concerns of the environmental community by calling for a rate that is high enough to provide greater emissions reductions than regulations already in place. WRI research shows that models tend to underestimate the emissions reductions from a carbon tax, so it seems likely that the United States would achieve its 2025 emissions target under this proposal.

Benefits for poor and middle classes. As WRI research has shown, a carbon tax’s effects on household finances are most heavily dependent on how the revenue is used. According to the CLC proposal, all tax proceeds would be returned to the American people on an equal basis via quarterly dividend checks. CLC chose this approach because of its transparency and because the longevity of the policy would be “secured by the popularity of dividends.” In addition, this tax-and-dividend approach would be highly beneficial to poor and middle-class households, who would receive far more in dividends than they would spend on the tax. (Of course, these householdsand all householdswould also benefit from cleaner air and reduced risks of climate change.) High-income households, on the other hand, would be better off if the revenue were used in other ways, such as to lower other taxes.

Addresses concerns about U.S. competitiveness and international action. A core pillar of the CLC proposal is a “border carbon adjustment.” Exports to countries without comparable policies would receive rebates for carbon taxes paid, while imports from such countries would face fees contingent on the carbon content of their products. The border carbon adjustment would protect the competitiveness of energy-intensive companies and those that are subject to foreign competition. It would also encourage all U.S. trading partners to adopt similarly stringent policies, which is necessary to achieve meaningful global progress on climate change.

Cost-effectively reduces emissions. As economists will tell you, putting a price on emissions is the most cost-effective way to reduce them because it encourages producers and consumers to seek out the lowest-cost opportunities to reduce their emissions. Economic models show that for decarbonizing the U.S. economy, economic outcomes are far better with a carbon tax as the centerpiece of policy efforts as compared to a strictly regulatory approach.

Offers potential for bipartisan support. Transforming to a low-carbon economy is an objective that Democrats widely support, but it will require new and comprehensive legislation that attracts Republican support as well. Prominent Republicans are supportive of the CLC proposal because it embraces both free markets and limited government with its plan to eliminate regulations that are no longer necessary with the existence of the carbon tax (“Less Government, Less Pollution,” as CLC puts it).

More Details Eventually Needed

The CLC proposal will need to gain support from policymakers currently in office for it to become proposed legislation. If it does, important details will need to be filled in. Examples include:

Details of the regulatory reform. The CLC plan involves replacing much of EPA’s regulatory authority over carbon dioxide emissions. Environmental groups are likely to push for mechanisms to ensure that the emissions reductions needed to meet climate goals are sufficiently certain; the Environmental Defense Fund recently described options for combining such “Environmental Integrity Mechanisms” with a carbon tax. In addition, the policy should avoid eliminating regulations that are not duplicative with a carbon tax. For example, WRI research has explained why supporting the research, development and deployment of the next generation of low-carbon technologies will lead to more cost-effective decarbonization in the long-run.

Support for coal communities. While the near-term effects of a carbon tax on the vast majority of American households and businesses would be small, communities of coal industry workers (and others whose livelihoods are tied to a high-carbon economy) are already struggling. In order to avoid making the situation worse, certain policy measures must be in place to help rebuild these economies. Whether by allocating tax revenues to economic development in these communities (just a small sliver of the tax revenue could provide enormous help) or though separate legislation, support for workers in the fossil fuel industry should be a key consideration in designing our country’s decarbonization strategy.

Despite this support, political gridlock and the powerful corporate opposition have obstructed policy action at the U.S. federal level. Overcoming these entrenched interests will require courageous politicians. This proposal deserves serious attention from the Trump administration and policymakers on both sides of the aisle.

Noah Kaufman is an economist for the U.S. Climate Initiative at the World Resources Institute. The focus of his work is on carbon pricing and other market-based climate change solutions.